According to IRS data corporations are not reinvesting savings from the Bush and now Obama tax cuts into creating new jobs, instead they are hoarding a record amount of cash. David Cay Johnston explains how cash is being used to buy back stock or sitting in low interest bearing accounts which in turn, lowers the return to the shareholder.
The Fed’s latest Flow of Funds report showed that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets, which equals $5.1 trillion in today’s dollars, triple the Fed figure.
…From the companies’ point of view, it makes perfect sense these days to hoard cash.
First, Congress lets overseas profits accumulate untaxed, so long as offshore subsidiaries own the cash. Second, companies have a hard time putting cash to work because fewer jobs and lower wages mean less demand for products and services. Third, a thick pile of cash gives risk-averse CEOs a nice cushion if the economy worsens.
IRS rules apparently punish domestic companies while giving multinationals a pass.
Since the income tax system began, Congress has authorized a tax on excessive accumulated earnings to limit damage to the Treasury — and the economy — when companies hold far more cash than their operations require. Without the accumulated earnings tax, corporations can become bloated tax shelters instead of engines of growth.
A business holding more cash than its operations reasonably require can be hit with a 15 percent levy under Section 531 of the Internal Revenue Code, on top of the 35 percent corporate income tax. The Tax Court even devised a mechanical test in 1965 for how much is too much.
Historically the IRS has levied only privately owned firms or publicly traded companies with few shareholders. But Internal Revenue Code Section 531 applies to all corporations. President Ronald Reagan signed Section 532 (c), which made that explicit, though with an exception for untaxed offshore profits.
After reviewing decades of literature on these code sections, I cannot fathom any rational basis for giving multinational companies an exception to the cash hoarding rules, which discriminates against purely domestic firms.
Some of the multinational corporations say they will bring home what could be more than a trillion dollars if Congress will give them an 85 percent tax discount. The companies frame this as creating jobs. But as I showed in an earlier column, unless there are strict rules, the money can be used to buy back company stock while destroying jobs.
Read the whole article here
Here’s another possibility: companies, like responsible individuals, save money for a rainy day. Even a company as large as Apple can burn through a lot of cash quickly if the economy dips, competitor’s get an edge, or a couple of new products stumble in the marketplace. (I use Apple because after the heady days of the 80’s they almost went broke in the early 90s.) I don’t think our inept, incompetent and corrupt government is in a position to tell anyone what they should do with their own, hard-earned money. They’re already taking more than their “fair share”.
Well now, if SCDC was worth 2 cents they would have listened to what some of us have been saying since 2007, “instead of slipping cash into your buddies Boat Building School & them some, they should be building a facility for one of these conglomerates to call home”. Just like China has been doing, they build a Blank manufacturing plant to be tooled pending on a determination made at a later date. If cash was not hoarded the FED would not have to place more money into circulation…